a
look inside the venture catalystpartner
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don
laurie: ventures,
partnerships & growth (con't)

cases
in strategic models

Case
# 3: Thermo Electron

Thermo
Electron
is an amazing company. They have done 23 spinouts of 23 new
businesses. George Hatsopoulos is 77 now. He retired two years ago
and started his own venture firm which has a 10-year life. He did
that at age 75.

One of the characteristics that is most unique about Thermo
Electron is that they hire a lot of MIT entrepreneurs. If you are
hired by Thermo Electron and haven't started a new business
between three and five years, you consider yourself a failure. It
is not a “job for life” mentality, but a lot of engineers go
into companies with it, so you fit or you don't fit.

If you are a Thermo subsidiary and somebody comes to you
with the idea, say a heat-driven flashlight rather than one that
runs on batteries, you give them funding and get them started. If
they get it to the point where they might be able to actually get
funded, they fund it through private equity, not by the
corporation. Hatsopoulos has a group of friends and others who
will put in angel money. You may only have five or six people in
it now; but, then, very soon, they will go out to the public
market and do an IPO. They will have a valuation of $200 million
on it. They will raise 25%, and $50 million will go to Thermo
Electron. The interest on that, something like $3 million a year,
roughly, goes to the entrepreneur. They hold the $50 million and
tell the shareholders that if at any point within the next five
years they would like their money back, they can have it back at
the price at which they bought the stock. They have a guaranteed
upside and no downside.

Once the technology is beginning to cook, they send out
scouts to look for what they affectionately call a “wounded
eagle.” A wounded eagle is a potential acquisition in the area.
If the idea was for a flashlight, maybe there is an old flashlight
business or some variation on that theme. They will acquire it
with Thermo's high flying stock, which is a precondition, do a
cleanup on it, drop the technology in, and they have a new
company.

In order to do this, they have to hire people from the
Harvard Business School who have six or seven years of experience.
They’re called “entrepreneurs in residence,” but they buckle
up a technologist with passion, a market applications person, and
an entrepreneur. Sometimes the entrepreneur is the marketing
person or the technology person, and they give them legal and
financial support. The CFO sits on all 23 boards so they can see
how the money is moving around in them.

Case
# 4: Corning

Roger
Ackerman, who ran Corning until
a couple of months ago, is something of my hero in all of this. He
is a technological entrepreneur if you ever met one. When I was in
Roger's office, he said, “Let me tell you, Don, how we think
about ventures. We want 70% of our businesses to be in the growth
sector. We want to have some cash cows, and we recognize that we
will have some where there is a demise of a customer.”

Everybody's mother used to use CorningWare.
That was the jewel in the crown of Corning. No more. He sold it
about four years ago because they figured the market was flat.

What he got are investments that he actually calls
“Venture Capital” in the business model. When he talks, he
doesn't sound like a Fortune 500 guy, he sounds like a venture
capitalist. He says, “We are placing bets here and there. My job
as a CEO is to place bets.”

Remember the issues I mentioned about operating plan and
values? “By the way, Don,” he said, “We don't have any of
those problems.”

I said, “Roger, you are a big company. You must have
those problems.”

He said, “No, Don,”

I said, “Convince me.”

He drew a graph showing revenues in billions over time, and
mapped out four phases along a snaking line: invention,
incubation, growth, and mature business.

I said, “Tell me why you don't have those problems,
Roger.”

He said, “It is easy.” He put his finger on the
“mature” phase and asked, “Do you know who runs that?”

I said, “No, Roger, who runs that?”

He said, “Our fat, dumb tackles.” I apologize for the
male-oriented sports metaphor. Then he moved his finger over to
the “incubation” phase. “Do you know who runs that, Don?”

I said, “No, who runs that?”

He said, “Our smart, handsome quarterbacks.”

Instantly, he had done this shift away from “if you run a
big business, you are better than if you run a small
entrepreneurial one.” He was saying that the hopes for the
future are the people that can manage those entrepreneurial
ventures. What he was saying: Innovation is in our blood. This is
not something we do as a time-to-time initiative. It is in our
spine. It is part of our strategy. It is the way we work.

Then, at one point, I got to know another diagram from
Corning. It is a standard stage/gate diagram which you
entrepreneurs should know. They have market, technology, and
manufacturing teams working together over the various stages:
build knowledge, demonstrate feasibility, test practicality, etc.
It is well documented in my book, but the point I want to make now
is not about stage/gate diagrams, it is one of the things that
Charlie Craig who runs their whole development process said:
“There are two difference between us and others. First, most big
companies begin to put the cross-functional teams together when
they get to the ‘test practicality’ stage, we do it when we
are in the ‘building knowledge.’”

When they are talking about building knowledge, they are
talking about understanding the future. What are the trends and
discontinuities out there? They build futuristic event maps, and
they begin to ask about the unmet, unserved needs of the future.
They ask: What kind of product attributes can we build and apply
so we can build products and new technologies?

Craig said, “The second thing is -- this is critical, Don
-- is that this is a breeding ground for leaders. If you can't
manage this process at Corning, you can't be a general manager in
the future in terms of running these businesses.”

That is critical because leadership has to decide when to
go slow and have a formal review, versus when to blow through one
of these gates in order to get to market fast. “When do we build
the prototype?” versus “When do we put people on the
manufacturing line and build the prototype and the product
simultaneously?” It is a different kind of leadership.

They pointed out something else. They said, “Here is a
typical portfolio map where we look at the return against
possibility of success.” Most companies would look at and start
investing in companies and technologies up here. They will have
fiber optics and medical science, and they will have a cumulative
map, but the thing I found most interesting is that the nature of
the debate in Corning is to look down here and ask, “What does
it take to move these up there?” It is not just an analytical
tool; it is a dynamic and strategic tool for managing multiple
technologies in one of the most interesting high-tech businesses
in America.

Case
# 5: Nortel

I
will now shift gears and come to Nortel.
Nortel is in the tank right now, by the way, but their business
model, in this sense, was very interesting -- kind of an external
venture like Intel and GE, but they also do it with partners
rather than by themselves

They said: “If we create our own dedicated group, we are
not going to get the best deals.” They looked at 100 different
venture capital firms, got that list down to 20, looked at who was
who, got that down to six, and became limited partners in each.
When they became limited partners they did side-by-side agreements
so that they could sit next to Battery Ventures, for example, and
see the deals. If Battery said no, they could still say yes.

They did 100 of these ventures, and, in all 100, they
either had a distribution agreement or a technology agreement.
They didn't want to invest in anybody if they didn't think they
could add value or gain benefit, and they are very focused in that
sense.

Which brings me to a piece that I want to talk about
briefly: partnerships between large global corporations and
venture groups. You will see more of that in the future.

Some of you have probably read that in 1994, venture
capital levels were $5.5 billion, and about 1% of that was
corporate venture. In the Year 2000, $102 billion was invested by
the venture capital community, and 18%, or $20 billion, was by
corporates. What happened in 2001 is that in the first six months
they wrote-off $9 billion. Just in the past couple of weeks I have
been reading, I think it was NTT, just wrote-off $4 billion. It
drives to the question: Will they leave the playing field?

I think you will see three kinds of things. You will see
companies like Intel and GE and Johnson & Johnson and Dell for
whom it is so strategic that it is in the fiber of what they do.
They are not going any place. Then you will see others like Wells
Fargo, which lost a billion dollars; Comdisco, which lost $150
million, and Compaq, which has a corporate venture capitalist in
every division. It was undisciplined and unmanaged and
opportunistic and they are off the field. Then you have the people
in the middle who are trying to figure out what to do. One of the
reasons is that these CEOs have learned that this is an area of
new technologies, an area for emerging markets, a place for
distribution agreements, a place for technology agreements. If
they miss a technology cycle in their business, they can be dead,
and their current R&D won't get them to the future. There is a
conundrum.

One of the things you will see from this is partnerships
where the corporation hooks up with a venture firm, such as Zero
Stage Capital where I do some work. The corporation will say:
“Here are strategic boundaries. Here is where we want to
invest.”

They will have to use a large target. There aren't enough
deals in the bull’s eye if you define it too tightly. It’s not
only that. When I was working with Nokia, at one point they were
saying that the bull's eye was mobile phones and pagers. Somebody
said, “I have this great deal.” They replied, “We are in the
mobile phone and pager business. Why would we want to invest in Palm
Pilot?” Well, two or three years later, their strategy
changed because the technologies converged. That is the strategy
of the entrepreneur and the strategy of the big company, so you
have a “big shot” group. You have to invest with a company
that invests in your domain, so to speak. They will create
dedicated corporate venture funds where the venture fund will
manage $30-$40 million and they will take carried interest and a
management fee. The CEOs have a new tone. It used to be: “Why
should we pay 20% carried interest?” Now it is: “If it costs
me 20% interest and it gets me to the strategic future, I'm
willing to pay.” It delivers above average financial returns
anyway, so there is a shift in the mindset and the needs, in that
sense.

Case
# 6: Cisco

Cisco,
is the company I didn't know where to put in my earlier matrix. It
became “Acquisition and Integration.”

Cisco has been remarkable to me in the sense that they
don't have any R&D. Silicon Valley is their R&D, and they
did that partly because of the way the company built up, and
partly because it was a faster route to market. If you look at
their annual report, you will see that they have $3 billion
dollars in R&D, but that is not product R&D. Those are the
people who stitch all these acquisitions together and make them
work within the Internet infrastructure business.

They don't have a venture group, but they have this venture
acquisition group where they will go out and find the next
acquisition. If you are acquired by Cisco at 11:00, you will have
business cards and pads of paper on your desk when you come in. A
week later, you will be fully integrated into their computer
system, and, a month later, they will have interviewed you and
know what your future is within the company. They have had an
amazing retention rate through all of this, however.

The other thing is that you get two boosts. One was,
because of their high flying stock, they were able to compete with
IPOs. The second was that they were the most e-enabled company on
the planet. Whether it is dealing with suppliers 100% over the
Internet, or dealing with customers 85% over the Internet, or
dealing with employees 100%, you become extremely e-enabled.

Case
# 7: Johnson & Johnson

The
last company that I would like to talk about is Johnson
& Johnson, and the reason I want to talk about J&J is
that J&J does it all.

I'm going back to the framework and look at external
investing. Johnson & Johnson Development Corporation (JJDC)
invests $80-$100 million a year in 25-30 ventures. They have 10
corporate venture capitalists, and they are in Silicon Valley and
Brunswick, New Jersey, and Israel and Europe. They also invest in
areas they don't know. For example, with Hambrecht & Quist,
they put $30 million in for medical information technologies which
they didn't know anything about, since they are more in devices
and pharmaceuticals. As I talked about earlier, they let Hambrecht,
invest on their behalf.

In terms of “we will do it ourselves,” they are very
entrepreneurial. They invented the stent that opens up arteries in
the heart, and they invented the arthroscope that does
arthroscopic surgery in your leg. They licensed Accu Lenses and
built that into a multibillion dollar business.

Down here, under Partners, JJDC, Medvest, and Marquette put
in $10 million dollars each and hired an entrepreneur. They said,
“Go find us a business to run.” You will hear soon, if you
haven't already, about something called the “Ibot.” The Ibot
is the wheelchair that goes up stairs and across sand. An inventor
said: “I have this invention but I need capital and management,
then I need the skills to get it through the regulatory
process.” They put in $200 million.

The last bit is down here in Acquisition & Integration.
They were never in urology, but they have a science group that
gives grants, not capital, for equity. Just grants. They gave
$50,000 to two scientists who had seed technology for a prostate
cancer cure. A year or two later, Brad Bell, one of the corporate
venture people, came in. They had gotten quite far along, so he
helped them write a business plan -- they never had written a
business plan -- and he gave them $2 million to get started. Three
years later, they bought the business for $100 million and they
acquired two or three urinary tract businesses. They created a
urology division which is one of the fastest growing divisions in
medicine, a new division they were actually operating.

what
makes an entrepreneur?

This
is all very interesting, but, when you hear about all this
structure and how these big companies go about it, what I realized
is that you can't have a venture without an entrepreneur. That
gave rise to a question I would like to ask you: How do you know
an entrepreneur you see one?

Audience
Member: You feel their excitement about their projects and
ideas.

Audience
Member: You look for previous risk taking.

Mr.
Laurie: When they were a kid, did they take charge as a kid,
or did they always go to somebody? This guy has taken three risks.
Look how bloody he is. He is just right for me.

Audience
Member: An original idea.

Mr.
Laurie:
It is quite a mix, but the two people I asked this question of
were Michael Moritz of Sequoia
Capital and Howard Anderson of YankeeTek Ventures. They both
said, “You don't. You can tell after they have done one or two
deals.” Everybody knows that Bill Gates and Michael Dell are
successful entrepreneurs, and Roy Kroc who started McDonald's.

Howard said: “If I see the person has a plan and
understands the market, I will give them 25 points out of 100. If
I see that they are in a hot industry growing at 50- 60%, I will
give them 25 points. If I see they have a track record -- because
the best predictor of the future is what has occurred in the past
-- I give them 25 points. Finally, if they have good beta
customers, I give then 25 points. If they have GE and Goldman
Sachs, I think they've got something. It is an acid test.”
Basically, it is a different way of thinking about it. We all know
that entrepreneurs are fiercely independent, that they continue to
go on, etc., but those are a lot of intangibles that are difficult
to measure for a wily venture capitalist or a cynical corporate
type. It is worth thinking about.

working
with corporations

Why
is it so difficult for most large global corporations to achieve
their potential? There are a few structural factors.

One is that in the corporation they have to write off the
losses right away. If you look at the time cycle for a typical
venture, at about two-and-a-half to three-and-a-half years, you
are at your deepest loss. That is inconsistent with the promotion
cycle at most companies. Fred was innovative and said, “Let's
venture here.” He has three or four deals, then Joe comes in and
says, “What was Fred thinking when he began to invest in
this?” Just as it is about to turn the corner, they exit.

Another thing is that they have a very different view of
risk minimization. In the venture business, the risk minimization
is to invest in 20 or 30 ventures: two or three of them will pop,
40% will fail, and the others will chug along. In a corporation,
however, they will say, “We will have you do this one, Mark,
and, if you don't make this successful, we will never do it again
here at the ABC Company.” It is a very different view of risk
minimization.

The other aspect is the risk/reward factor. The big company
employee is normally kept on salary. They say, “We are proud of
you for doing this,” but this is risk and he or she is out of
the mainstream. For the entrepreneur, however, if you take a
company public at a $200 million market cap and you own 7%, you
just made a lot of money. In the corporation they say, “We can't
pay them that way; he will make more than the president.” The
entrepreneur will say, “Yeah, that's the idea. You have got
it.”

The other thing that hit me is that, to most entrepreneurs,
the risk is high, but so what? Most of them are unemployable by
these big corporations. They are absolute misfits. I hear these
corporations say, “We have to get more innovative and
entrepreneurial around here. Let's get some entrepreneurs.” They
hire them and, in the room after, they say, “She will never fit
in here.” If she comes in, they can't understand her six months
later because she is so focused and she wants to do things her
way.

The last piece is that there is a big difference between
the way the VCs and the corporations look at the cycles. For
example, there are different hot technologies. If we go back a
year and a half ago, it was all optical networks, now it is
general. Nobody knows what “it” is, actually. It is electronic
storage and a series of different things. There is biotech. There
is a big shift in the technologies, but, if you are an optical
networking company, you can't switch to biotech. There is a
venture investment pipeline, and the VCs are fighting to get to
the next big market and, secondly, to get their first. At some
point, that pipeline gets filled.

I remember somebody saying to me when Singapore Networks
went public that it was the last great optical network company to
go public. More or less it was. The pipeline gets filled because
it goes to the IPO pipeline, which gets filled, and you can only
take so many of these companies public. That is a fundamental
difference between the way the VCs look at it versus the
corporates. Corporations will say, “We are in this for strategic
reasons.”

Let me wrap up by touching on two or three issues that I
think you ought to be aware of in the corporates.

Internally there is a debate. Should we own 100% of our
ventures or partner with experienced venture managers? The debate
goes like this: In the left corner, wearing the blue trunks, are
the people saying, “This is our idea, our asset, our people.
This is an important source of growth. We can't abdicate power. We
will lose many of our people and the entrepreneurs will make more
than our CEO. We ought to be able to do this ourselves. We will
maintain control and get 100% of the benefit.”

On the other side, they will say: “Spinout with partners.
We don't have a heritage or track record. The best idea is the
independent access and entrepreneur resources. This is real-time
R&D. We have to attract serial entrepreneurs like yourselves.
We have to get off balance sheet financing. We will get a higher
valuation. This will be for faster learning, and we will get a
better shareholder return.”

When I was writing the last chapter of the book, I asked
myself, “Does all of this matter?” I got interested in it, but
does it matter? I finally concluded that it matters if it creates
shareholder wealth.

Even in corporations there are two competing perspectives
on that. One is: “No. Corporate investing is cyclical. We gear
up in success and exit in difficult times. Success is a one-time
spike in earnings.”

Here’s a story. Adobe invested in Netscape and worked
with them. A year later they made $300 million. They showed Wall
Street, and Wall Street said, “We are not doing anything to your
shares. It is a one-time spike in earnings.” Adobe said, “We
will show you!” They wrote a letter to their shareholders and
gave them dividends in this. Do you know what their shareholders
said? “Don't ever do that again.” They said, “We are
investing in you because you are a software company, and if we
want to invest in Netscape, we will do it.”

In the other corner they answer the question of shareholder
value by saying, “Yes. This is a window on emerging markets and
a source of distribution agreements. Ventures become customers and
suppliers. Their source of operations is an improvement.”
Sixty-six percent of the investments GE Equity makes have GE as a
customer. It is a source for the next new thing, and the
acquisition and integration can enhance portfolio
productivity.

I want to touch on that for a second. I brought Unilever
into one of the venture firms, Advent. They had two kinds of
ventures they were potentially interested in. One was consumer
products, and I was amazed that they had so many consumer
products. Advent had invested in 30 worldwide. The other interest
area was things that would enhance their productivity and
efficiency, like supply chain management, CRM, and asset
management. I really brought Unilever in there to see the future
of other consumer products, and they were much more interested in
productivity and efficiency improvement. A lot of these companies
really love to be beta testers, and we will talk in a minute about
how you get to them. These people are saying ventures are
strategic and a real source of growth and we need to educate Wall
Street.

When I'm talking to the corporations, my message is that
you can't steal Intel's idea or Corning's ideas. It doesn't work
that way. You have to stand back, take a look, and ask: What is
the venture strategy that will fuel your growth? You need your
framework, your own. You need to start where you are standing, not
where Intel is standing, and you need a common language and common
base of assumptions, but, if you don't venture, you will not grow.

What are the benefits to the entrepreneur? There are a lot
of benefits. The first is a source of capital. These corporations
have a lot of money. The second is the distribution agreements. It
is not just capital; it is value-added capital. If you have a
healthcare venture and you get Johnson & Johnson money, you
also potentially get their distribution agreements. Instantly, you
have worldwide capabilities to distribute or put a turbocharger on
your product.

In terms of technology partnerships, there are a number of
companies I have worked with that, once they found a venture
working in a particular technology area that they were working on
simultaneously, they closed down their internal R&D and went
with the venture. Another example is that I was with Joe
Schoendorf from Accel Partners,
who is kindly quoted in the book. He talked about a situation in
which an entrepreneur had some middleware technologies that he
thought would be perfect for Michael Dell. He called Mike who
called back half an hour later and did a private labeling deal for
small- and mid-sized businesses.

Customers can be another benefit. For an entrepreneur to
have some of these big companies as customers increases your
valuation. There are early adopters in these big corporations.
There are early adopters in IT and there are early adopters among
general managers. They are willing to experiment with companies
like you to go forward.

The lastbenefit is learning and support, post-investment. I
mentioned the situation with GE where what they do is not only
hard due diligence, but they will come in and teach you Total
Quality Management. Some of these things are invaluable. If I go
from entrepreneur A to B to C, each one is learning the same
thing. In big companies they can say, “Let's get a flip chart
out and see how we will manage the brand. Let's get a flip chart
and talk about the problems in supply chain management.” Large
companies have made many of these areas routine and the problems
have been solved. Yes, they are cumbersome, but if you can learn
about and adopt them, you can build a quality company faster.

There was another story that Joe Schoendorf told me. One
day they were having a portfolio meeting of their 100 CEOs. They
called up John Chambers, the President and CEO of Cisco, and
asked, “John, would you speak to the portfolio CEOs?” He said,
“Yes, under two conditions.”

“What are the conditions?”

“First, I can stay all day. Second, I can bring my entire
management team.”

At 7:00 in the morning, John Chambers was pouring the
coffee for the entrepreneurs. At 10:00 at night, there were seven
executives at seven different tables pouring the wine.

The following year, they invited Carly Fiorina, Chairman
and CEO of Hewlett-Packard. She said, “Sure. I'll be there. What
time?”

“2:30.”

At 2:00 she was stepping on her private jet in San Jose for
the 11-minute flight to Monterey. She got out of the car, was
driven by limousine to Pebble Beach, arrived seven minutes before
hand, spoke for 40 minutes, spent 300 seconds each with the four
most important people there and left.

Why am I saying that? If I've learned anything through this
work, there are two preconditions that you need to think about as
an entrepreneur considering working with these companies. One is,
does the CEO get it? Is the CEO somebody who is curious, has
foresight, has a vision for their business, and is really
committed to growth, or does that person make the trains run on
time?

The second is, is the culture welcoming? You will figure it
out when you enter. Within half an hour, you will know. Are they
superior and arrogant, or are they welcoming and curious? Those
are big clues for an entrepreneur because you don't have the time
to spend with the latter group.

I would like to thank you very much for your attentiveness
and invite questions.

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